2007 Europe

Building the Financial System of the 21st Century:An Agenda forthe EU and the U.S.: 

Building the Financial System of the 21st Century: An Agenda for the EU and the U.S.

Session IIssuance of Securities: Corporate Governance and Liability Regimes in the EU and the U.S.: 

Session I Issuance of Securities: Corporate Governance and Liability Regimes in the EU and the U.S.

Private Enforcement: 

Private Enforcement Europe Procedural obstacles (rights, judicial competence, lack of discovery, fee shifting) Low incentives: small recoveries Europe should be very cautious about importing class actions U.S. Millstone? Deeply embedded in culture, legal system and politics Permit shareholder choice (e.g. class actions, jury trials, ADR)

Public Enforcement: EU: 

Public Enforcement: EU More institutional market Not done at EU level – all done by member states Citizens cannot directly insure enforcement Cumbersome infringement procedure FSA has prudential approach, so hard to measure enforcement Is public enforcement (e.g. by fines, restitution) adequate? Resource problem – FSA self-financed

Public Enforcement: U.S.: 

Public Enforcement: U.S. Less prudential, more “gotcha” NAAG problem (a.k.a. Spitzer): federal vs. state enforcement Race to “over the top” Federal criminal enforcement issues – U.S. attorney generals’ prosecution of companies Liability system encourages overly cautious behavior, e.g. SOX 404 audits, but broader problem as well

Transatlantic Agenda: 

Transatlantic Agenda Importance of competitiveness to both sides: jobs and GDP Approach: combination of mutual recognition plus convergence, issue by issue Mechanism: Merkel and EU-U.S. regulatory dialogue and/or G7 need for political involvement but when? Some key issues Should U.S. take a multilateral (EU) or bilateral (EU country) approach? U.S. acceptance of EU rules depends on EU enforcement EU acceptance of U.S. rules depends on U.S. changing its rules Some enforcement decisions should be made at transatlantic or global level, e.g. auditor prosecution that affects all countries Desirable level of regulatory competition?

Governance - I: 

Governance - I What does it mean? Shareholder activism – is it good or bad? Who has power? EU (U.S. Federal) or EU member state (U.S. States) Right approach dependent on shareholder structure: more reliance on shareholders, where large blocks, on directors where wide dispersion

Governance - II: 

Governance - II Executive compensation Winner take all trend: higher salaries at successful companies Shareholder advisory votes? Arbitrage to private markets: public company limits may cause better managers to move to private equity where compensation is not controlled Shareholder voting process Issuers do not know shareholders Hedge fund vote buying One share one vote: EU (not now) vs. U.S. (yes)

Session IITrading of Securities: Market Regulation and Structure: 

Session II Trading of Securities: Market Regulation and Structure

Trading Rules: Key Differences Between NMS and MiFID: 

Trading Rules: Key Differences Between NMS and MiFID Overall: most important objective of NMS is to protect retail investors, while MiFID is focused on creating a single market Best Execution (next slide) Data fees: regulated under NMS, not MiFID Prohibition of sub-penny pricing under NMS, but not under MiFID Dark pools: more pre-trade transparency under MiFID?

Best Execution: 

Best Execution NMS: price priority in fast markets (trade-through rule) vs. MiFID’s general duty, taking account of multiple factors No opt-out in NMS, while easy wholesale opt-out under MiFID, but mechanics of retail opt-out left to member states Role of clearing and settlement: slow/inaccurate process in EU could affect market choice

NMS – MiFID Integration: 

NMS – MiFID Integration Is it necessary given predominance of home-country trading? But transatlantic exchanges (NYSE Group) must now operate under two systems What country’s rules should apply for mutual recognition? Place of execution (exchange)? Place of purchaser? Where are these places for electronic trading? Do we need harmonization? Of which rules?

Other Observations: 

Other Observations High cost for small intermediaries – barriers to entry EU deadline may need adjustment (NMS postponed several times) Do both NMS/MiFID discourage innovation? Enforcement nightmare

Session IIIDerivative Markets: Alternative Products and Financial Stability Monitoring: 

Session III Derivative Markets: Alternative Products and Financial Stability Monitoring

Derivatives: 

Derivatives Do they increase or decrease financial stability? What will be the implications of trading credit derivatives on exchanges? Competition between OTC and exchanges Greater retail potential on exchanges Conversion from physical to cash settlement: does the ISDA “Dura Protocol” auction procedure solve the problem?